History 271
Devine
Spring 2015
Freedom from Fear: Franklin D. Roosevelt and the New Deal
Four major problems Roosevelt has to address upon taking office:
1) a failing banking and financial system
2) unemployment
3) agricultural overproduction
4) prices of goods and wages for workers
In the long term, he wanted to institute reforms that would provide a social safety net for
Americans that would enable them to have more financial security, particularly when
times were hard.
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In 1932, at the worst point of the Great Depression, Americans went to the polls to elect
a President.
President Herbert Hoover, when elected four years before in 1928, was considered the
most qualified man ever to run for the office. Even Franklin Roosevelt remarked at the
time that no one would make a better President than Hoover
Unfortunately for Hoover, the stock market crashed seven months after he took office
and nearly four years of unrelenting hard economic times followed. Though not
Hoover’s fault, the Depression ruined Hoover’s reputation and political career.
In November 1932, he lost in a landslide to Franklin D. Roosevelt.
Between November and inauguration day (March 4, 1933) the economy continued to
slump. By March, it appeared the entire banking system was near collapse.
Fearful that banks would go under, many depositors had run on the banks to withdraw
all of their money. Since the banks only kept a fraction of deposits on hand, they were
unable to give depositors all of their money.
When depositors insisted on withdrawing their money all at once, banks did not have
enough cash on hand to meet the demands, and some otherwise healthy banks had to
close their doors.
Beyond that, when banks had to pay out their funds to depositors, they could not use
this money to lend to people looking to borrow money to expand businesses, meet
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payrolls, and build new factories. As a result, credit became harder to get and many
businesses suffered or even went bankrupt.
Hoover contacted President-elect Roosevelt and urged him to announce his support for
Hoover’s efforts to save the nation’s banking system.
Roosevelt refused to commit himself and would say nothing in public. In the days
leading up to his inauguration, however, he did allow his staffers to work with Hoover’s
Treasury Department staff to work out a plan.
When Roosevelt took the oath of office at noon on March 4th, the Hoover and Roosevelt
people switched sides of the desk in the Treasury Department and continued working to
save the system.
The plan to emerge had THREE PARTS to solve three major problems:
1) To restore public trust in the banks, the government established the Federal
Deposit Insurance Corporation (FDIC) that would insure depositors’ money up to
$100,000.
Thus reassured – and with some encouragement from Roosevelt himself in the
form of a “fireside chat” broadcast on the radio – the people returned their money
to the banks and the system stabilized.
Government’s insuring of deposits, however, might have motivated some
unscrupulous bankers to make riskier loans or investments with depositors’
money (since if they lost the money, the government – and not the bank – would
make sure the depositors got their money back.)
2) To address the fact that banks had been using depositors’ money to make overly
risky investments, Roosevelt asked Congress to pass the Glass-Stegall Banking
Act. The act separated savings (or commercial) banks from investment banks.
Those who preferred to have their money invested conservatively – in
government bonds, etc. – but accrue only a low rate of interest would deposit
funds in savings banks.
Those who had more disposable income and who were willing to invest in more
risky (but higher yield) investments could put their funds into investment banks.
The act enabled people to make more informed decisions about where they put
their money and how much risk they were willing to take.
The act also established more government oversight of banks’ investment and
lending policies thereby enabling people to feel more secure that their money
would not be squandered by irresponsible or dishonest bankers.
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3) To address unethical behavior on Wall Street, Congress created the Securities
and Exchange Commission (SEC). This agency was charged with stopping
“insider trading.” It insured transparency – all investors would have access to the
same information when they made a decision to purchase a stock; no one would
have an unfair advantage because they received “inside information.”
Those purchasing stocks would be well informed about a company’s financial
profile, potential earnings, recent history, budgets and expenditures, etc. since
the SEC required all of this information be made available to the public.
The SEC also standardized accounting procedures so that potential investors
could easily understand every company’s financial report.
To head the agency, Roosevelt chose Joseph P. Kennedy one of the leading
“insider traders” of the 1920s. He figured, correctly as it turned out, that a person
who had so succeeded in “gaming” the system would be the best to oversee the
new regulations and to insure that nobody was able to get around them.
*******
After addressing the nation’s financial security, Roosevelt turned his attention to the
problem of unemployment, which was nearly 25% when he took office.
Roosevelt, a firm believer in the Protestant “work ethic” and a staunch opponent of “the
dole” (cash grants to those who were not working), at first refused to consider giving
direct cash grants to the unemployed.
After consulting his economic advisors, however, Roosevelt acknowledged that to
revive the economy, consumer purchasing had to increase. The only way to achieve
this was to get money into people’s hands as quickly as possible so they could spend it
and thus start the process of economy recovery.
Knowing that cash grants to the unemployed would be politically unpopular, he had to
“sell” his plan to the people by using the metaphor of “priming the pump.”
Most Americans – and particularly those who lived on farms and in small towns –
understood that to get a pump working so it could extract water from the ground, one
first had to add water to get the process started.
Roosevelt thus equated the initial cash grants with “priming the pump.” Once the
economy began to revive, he would discontinue the “dole.”
The agency that oversaw the distribution of cash to those in need was called the
Federal Emergency Relief Administration (FERA). Roosevelt emphasized the “E” –
emergency – to as to reassure Americans that such grants would not be routine.
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Next, Roosevelt backed public works programs.
Such programs included the building of infrastructure (roads, bridges, dams); the
construction of federal government buildings (especially post offices); and the
development and improvement of private and federally owned lands (irrigation projects,
hiking trails in national parks, planting rows of trees to keep the top soil from blowing
across the country during times of drought).
These projects had a far more significant economic impact that cash grants because
they not only employed people who would work for the federal government but also
people in the private sector.
Consider, for example, the variety of jobs created when a post office or dam is built.
Public works projects stimulate the economy by creating demand for various materials
and manufactured goods, employing workers, and even employing those who serve the
workers’ needs.
*******
Roosevelt next turned his attention to the plight of the nation’s farmers, who, as
usual, were producing too much and, in doing so, were driving down the prices of their
crops.
Employing an innovative strategy, he introduced a program, the Agricultural Adjustment
Administration (AAA), that would pay farmers not to grow crops – to leave their fields
fallow.
This, Roosevelt believed, would address two problems at once – farmers would produce
fewer crops AND their income would rise due to the government subsidies.
Unfortunately, the AAA also raised the price of food at the very time when consumers
could least afford such an increase. Even if the farmers were doing better, they wouldn’t
be for long if people could not afford to buy food. Also, farmers themselves grew staple
crops and were not self-sufficient (they didn’t grow all of their own food). They might get
more for their cotton, but this was offset by having to pay higher prices for food.
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Roosevelt understood the dilemma the AAA created, so he sought to address the
problem by creating the National Recovery Administration (NRA) as a way of
addressing the problem of prices and wages.
Under the NRA the government would set prices of nearly every commodity and
manufactured good. This “managed competition” was intended to help businesses get
back on their feet and to avoid cutthroat competition.
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If you sold butchered chicken, for example, you could not charge less than a certain
price per pound or you would be in violation of the law.
The NRA price codes RAISED prices (much as the AAA raised prices).
However, the NRA also included a measure to raise wages, which would address the
problem of “underconsumption” (that is, workers being unable to afford to buy goods
because their wages were too low.)
In theory, higher wages would help workers buy more things. If merchants sold more
products to these workers, the economy would improve.
In fact, raising wages did not always have this effect.
Businesses had for some time pursued a “high wage” policy. Employers preferred to
hire skilled, efficient workers and pay them more. In doing so, they could more easily lay
off unskilled, inefficient workers and save on labor costs. For example…
A company employs three workers at $1/hr. Two workers are more productive than the
third, so the company raises their hourly rate to $1.25 and fires the third worker. Labor
costs in this instance went from $3/hr (3 employees at $1/hr per worker) to $2.50/hr (2
employees at $1.25/hr per worker). The employer expects the two productive
employees to work harder now that they make more, so productivity increases as labor
costs go down.
By requiring businesses to pay higher wages, the government precipitated an
unintended consequence: unskilled, unproductive workers were more likely to be fired
and, once unemployed, they found it much harder to find another job since employers,
now paying higher wages, preferred to hire more productive workers.
Ultimately, neither the AAA nor NRA achieved their intended purposes. In fact, the
Supreme Court found the NRA unconstitutional in a 9-0 vote and the agency folded.
The Court held that the federal government in setting prices for goods and commodities
overreached by trying to regulate intrastate commerce (trade that goes on within the
borders of a single state.) The federal government could regulate prices of goods that
were bought and sold across state borders (interstate commerce) but federal regulation
of prices within a state was unconstitutional.
*******
Beyond addressing the emergency conditions that the Depression had created,
Roosevelt also hoped to find long term solutions that would insure Americans some
degree of financial security should another depression occur in the future.
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Older Americans were most vulnerable to economic hard times. Retired workers relied
on meager pensions, private charities, and the generosity of relatives to sustain them.
Roosevelt wanted to create a “social safety net” for these people.
Simply giving them money would have been politically unpopular and also conflicted
with Roosevelt’s hostility to “the dole.”
Roosevelt also knew that some future Congress might vote to end this program. He
needed to implement a program that could not be dismantled or cancelled.
Accordingly, Roosevelt set up a “social insurance” program – what we know as Social
Security.
The government would withhold a certain percentage of each worker’s paycheck and
“save” it for them until they retired. This set up insured the permanence of the program.
In 1938, when the program began, life expectancy was far lower (65-66 years). As long
as people did not live very long after retiring, the system would be financially viable.
Current workers paying into the system would fund the social security payments to
those who had retired. Today, when life expectancy is 78-79 years and when the baby
boom generation is moving into retirement, the system is facing unforeseen challenges.
There are more and more retired workers entitled to social security benefits and fewer
workers paying into the system.
Beyond social security, the New Deal also introduced unemployment insurance and
disability payments for those who could not work.
All of these programs sought to bring more stability to Americans’ daily lives and to
smooth the rough edges of capitalism (without challenging the basic premises or
mechanisms of a capitalist economic system.) In short, Roosevelt’s reform measures
sought to provide Americans “freedom from fear.”
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